If you are new to the real estate investing world, then you may have heard of wholesaling. But what is real estate wholesaling all about and what is its goal? What is the goal for a real estate wholesaler? The goal of a real estate wholesaler is to make a profit on each deal they do.
The goal of wholesaling
The goal of wholesaling is to find a retail store owner or manager who’s willing to buy your products in bulk for resale in their store. The store owner will then mark up the price and sell it for a profit, while you get a small share of the profit.Wholesaling One House at a Time
As I said, wholesaling is a flow business. One person could generate enough profit to allow him to quit his job and focus exclusively on wholesaling. Another could focus solely on purchasing and fixing one house every week or month and wholesale it, while some keep wholesaling one house at a time. Ideally, one person can wholesale at a time until they fix and resell the house to a retail store owner in his area.
In theory, wholesaling is very straightforward. However, with your initial conversation with the real estate wholesaler, you should determine their business model. Are they solely making money off of one house at a time? Or are they wholesaleing one house at a time? At that point, if the answer is wholesaling one house at a time, you have the potential of aligning with a wholesaler who has was successfully wholesaling from one transaction to the next for many years.
Some wholesalers make their money from continuing to wholesale one house at a time after the first fix is complete. Others wholesale more properties every month, each one marking up the price at a higher price until a retailer is willing to buy the product at a markup.
Wholesalers often set a profit target for themselves based on the sales volume of a particular house. This goal can vary from person to person and could be based on # of properties they have sold or the amount of data they have about an entire zip code or neighborhood. Unlike flipping, which is a more numerical and hand-to-eye type of approach, wholesaling requires more time and intuition.
How to achieve your goal of making a profit on each deal you do
To achieve your goal of making a profit on each deal you do, you need to focus on setting your prices. The best way to set your prices is to come up with a price that is fair and provides value for your client. You can do this by figuring out how much it costs you to produce your product or service and then adding a reasonable profit margin. This profit margin comes in the form of markups. What does this mean you ask? A markup is a markup taken from the product or service price before taxes (if any) are taken out. It is typically applied to the end product or service carrying a price tag between $1000 and $10000.
You can see the difference how one company approaches a project and what is offered in the middle-market:
As you can see, the middle-market company simply tries to set the price for consumers as low as possible. In essence, this is what you should set your prices to. What is the profit margin, you might ask? Profit margin is simply the amount you make on every deal you do multiplied by the number of deals completed.
Real estate wholesalers in the middle-market generally try to apply the gross margin to their business. The gross margin of a business is simply the profit the business makes on each sale.
The rough calculation of the gross margin is: Grossprofit = G (number of deals completed) / (gross proceeds from each sale)
The profit margin works based on a formula of the profit on every deal multiplied by the number of deals completed.
To calculate your profit on each product or service, copy and paste your product into Google search bar and perform a web search for a store location that sells similar products. You can calculate your profit margins based on the average sale prices. Remember, this profit comes BEFORE taxes are taken out from your deal price before profit is applied.
Not every company sells similar products, therefore they may decide to charge different markups.
What is the average profit that a wholesaler make on a deal?
The average profit that wholesaler make on a deal is about 1-4%. The percentage can vary depending on the profit margin of the company that you’re dealing with.
You can expect to make about $7250 per deal on average for a home under $125,000 in value based on 2021 Sales Reports for Urban concentrated areas. (Big Cities)
$13,325 per deal for homes from $125,000 – 250,000
$17,888 per deal for homes from $250,000 – 400,000
As you can imagine, a wholesaler’s client base is about 60% of all the entities who want to buy a property. In order to service these potential clients, a wholesaler must have a facility. According to Robert Reffkin of Real Trends Research,
“Supply chain began to be required to: (a) establish the condition of a supply; (b) determine product order and arrangements; and (c) ensure coordination of both the wholesaler and its brokerage partners. Supply chain “production” began to be regarded as part of a new capability of acquiring a host of competitive products and services on a large volume basis, which had previously been the preserve of player manufacturing companies.”
So, it seems logical that a wholesaler must have warehouses in order to process incoming orders and maintain inventory. The best warehouses are equipped with equipment to process lots of items in a quick and efficient manner. During its peak times, the wholesaler must have a warehouse within 100 miles of the home offices of its clients. And the closer you are to these clients, the more money you’re going to make.
A piece of equipment that makes a wholesaler’s job easier is a secure data communications system. This enables the company to transmit orders instantly from their client’s premises to the wholesaler, making the transport process a lot more convenient.
If you want to access your brokerage account online, then you’d better have an adequate internet connection. These days, there are plenty of ways to get connected.
First thing that they admit, most brokers offer their clients the possibility to set up an email account. However, an online brokerage account is a little different.
What is the difference between wholesaling and flipping?
Wholesaling and flipping are two different ways to make money in real estate. Wholesaling is when you find a motivated seller who has a property that they want to sell quickly, and then you sell the property for them. Flipping is when you find a property, fix it up, and resell it for a higher price.
Wholesalers are the people that are employed to find the sellers of the properties and negotiate with them for the best price. They then go through a process of “flipping” the property for their own profit. While some agents may think that they are focusing on selling a product but in reality their goal is to flip the property.
When they sell to the buyer directly, they are in essence working for the property dealer themselves as verified by the Realtor®, and the additional commission they take is in fact profit for them.
The type of commission goes as follows:
Wholesalers make up to $ 60 per deal ranging from commission and fees of 10% to 50% of the sales price depending on the location. In some states, appraisers are also needed to verify a property’s condition.
Though the commission can be attractive for those who are new to real estate, it brings more scrutiny on them than other occupations. The less that you are making, the more eyes there are against you, which can bring bigger problems.
To avoid potential problems, wholesalers will try and get you to sign a contract making you sign a waiver allowing them to sell the property without providing a free appraisal or any other assistance. You should always make sure that you know the process 100% before agreeing to commission and fees for any deal.
Some wholesalers will try to source their properties through a network of structural engineers, surveyors, and lawyers from the star ranked firms. An experienced real estate professional will know how to spot these firms. But some non-real estate professionals may go through a network of brokers that offer the same services but charge a commission.